Diversification when it hurts? The joint distributions of real estate and equity markets
Knight, J., Lizieri, C. M. and Satchell, S., (2005) Diversification when it hurts? The joint distributions of real estate and equity markets. Working Papers in Real Estate & Planning. 16/05. Working Paper. University of Reading, Reading. pp20.
Much of the literature on the construction of mixed asset portfolios and the case for property as a risk diversifier rests on correlations measured over the whole of a given time series. Recent developments in finance, however, focuses on dependence in the tails of the distribution. Does property offer diversification from equity markets when it is most needed - when equity returns are poor. The paper uses an empirical copula approach to test tail dependence between property and equity for the UK and for a global portfolio. Results show strong tail dependence: in the UK, the dependence in the lower tail is stronger than in the upper tail, casting doubt on the defensive properties of real estate stocks.